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Difference Between Equity Share and Preference Share

29 Nov 2023

Introduction

Shares are representations of ownership of parts of a company. As a shareholder, you enjoy voting rights and the right to participate in the company’s decision-making processes.

According to Section 43 of the Companies Act, 2013, the shares of any company are mainly of two types. These are equity shares and preferential shares. These shares offer their holders different rights and benefits. However, the major difference between the two is in terms of their voting rights and the distribution of dividends

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What are the Major Differences Between Equity and Preference Shares?

Equity and preference shares differ on various grounds. Let us delve deeper into them:

Ownership: 

  • Equity shares are also known as ordinary shares. They simply provide partial ownership of the company to shareholders. The shareholders are considered residual owners. They can lay a claim on the assets of the company after the settlement of all obligations. 
  • Preference shares, on the other hand, constitute hybrid ownership. They walk the line between shares and debt. Preferential shareholders enjoy benefits like fixed dividends and preference in case of liquidation over equity shareholders. 

Dividends:

  • The dividend for equity shareholders is volatile and depends on the fluctuations in the market. They may earn higher profits during a good year but similarly incur losses during a bad year.
  • Preference shareholders enjoy a fixed return and receive it before equity shareholders do. This allows them a stable income with minimal risks. But preference shareholders do not profit from additional earnings made by the company. 

Voting Rights:

  • Equity shareholders usually have voting rights when it comes to the company’s decisions. The number of votes they possess depends on the volume of shares that they own. This provides them with influence and power over the company. 
  • Preference shareholders often do not have power equal to equity shareholders. Sometimes they have little to no voting rights. They have almost no influence over the decisions of the company. 

Buy Back Policies:

  • Equity shares are not subject to buybacks. They can be sold in the stock market, but the company is not obligated to redeem the shares from the holders. 
  • Preference shares are usually convertible. Companies are allowed to buy back the shares after some time has elapsed. Sometimes shareholders can convert preference shares into equity shares after a certain duration as well. 

Conclusion

Both equity and preference shares have their pros and cons. If you are to decide between buying one of the two, you must assess your risk tolerance as well as financial objectives before making a buying decision.

 

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